(adds details, updates prices)
* Italian spreads widen, put euro under pressure
* Euro bids seen around $1.3660, options suggest more weakness
* Franc slides on Swiss deflation; SNB ready to weaken further
By Anirban Nag
LONDON, Nov 7 The euro fell on Monday as markets eyed a crunch vote on Italy's public finances amid concerns the euro zone debt crisis could engulf the country, while the Swiss franc was pressured by speculation of further policy action to curb its strength.
The Swiss franc tumbled against the euro and the dollar after Swiss National Bank chairman Phillip Hildebrand suggested the franc was still overvalued against the single currency.
That revived speculation the SNB may raise the floor on the euro/Swiss exchange rate, currently at 1.20 francs. .
Analysts said the franc's recent gains had been driven more by euro zone developments, and Swiss policymakers would take that into account before deciding whether to raise the floor. Still, with data showing deflation in October, the SNB had room to take more measures to weaken the franc. .
Investors continued to take a pessimistic view about the euro zone, with markets shifting their focus from Greece's chaotic attempts to get its bailout programme back on track to the region's third largest economy Italy, where Prime Minister Silvio Berlusconi is fighting for his political future.
The Italian/German 10-year government bond yield spread hit its widest levels since 1997 on Monday, a day before Berlusconi faces a parliamentary vote with rebels threatening to bring down his government over its failure to adopt structural reforms.
"The euro is under pressure as Italian spreads are up and that is a real risk factor," said Jeremy Stretch head of currency strategy at CIBC World Markets. "Italy is too big to be safe and markets are fearful that political uncertainty will claim its second victim."
The euro was last down 0.8 percent on the day at $1.3688, having hit a high of $1.3839 in the Asian session. Traders cited talk of momentum stops at $1.3670/80 with bids said to be lurking around $1.3660.
In a sign that markets already see more problems for the euro, option traders said there was some interest in longer-dated euro put options. In addition, one-month risk reversals were still not far from a record high in favour of bets on euro falls versus the dollar.
Greece's main political parties clinched a deal to run a coalition government, but any relief from that to the euro or other assets was fleeting as focus switched to Italy, the next potential flashpoint for the market.
A debt meltdown in Italy would pose a far graver risk to the 17-nation currency bloc than Greece. With Rome's borrowing costs soaring and 1.9 trillion euros in public debt, it is too large to bail out.
Berlusconi is scrambling to get support at a parliamentary vote, seen as a test of his political strength following a humiliating G20 summit where Italy agreed to the International Monetary Fund's monitoring of promised reforms.
Morgan Stanley in a trading recommendation said they expect a renewed move down in the euro targeting the $1.3365 area and then the $1.3100 area last seen in the beginning of October.
It added that the Eurogroup and the Ecofin meetings this week will be important while real activity data would needed to be watched for more weakness. As such, they have lowered their recommended entry level for euro/dollar shorts to $1.3760.
The common currency jumped against the Swiss franc with the Swiss inflation numbers boosting the case for policymakers to act again and curtail the franc's gains.
"The CPI numbers will add pressure on the SNB to back up its words and the markets are aware of that," said CIBC's Stretch."
The euro was last up 1.2 percent on the day at 1.2346 francs . The dollar gained more than 1.7 percent on the day at 0.9000 francs , advancing to 0.9030 francs on EBS.
The dollar index was up 0.4 percent at 77.251. Against the yen, the dollar was a tad lower at 78.10 yen with bids cited around 78 yen.
Reuters sources said trading evidence showed the Japanese central bank probably continued to intervene, albeit in small amounts, since Monday when Japan spent a daily record of some 7.7 trillion yen to curb the yen's strength. (Editing by Toby Chopra, John Stonestreet)
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